30th April 2024Proposed changes to the UK’s non-dom regime

In the Spring Budget 2024, the Government announced its plan to abolish the concept of domicile for tax purposes, and with it the associated ‘remittance basis’ rules that were first introduced more than a century ago.

However, these tax reforms will also impact some UK domiciled individuals.

Sam Dewes, Tax Partner at HW Fisher, explains what the main proposals are, and who stands to benefit or lose out from them.

What are the Government’s proposals?

The Government’s proposals, which are intended to apply from 6 April 2025, include:

• The existing non-dom tax regime (and associated remittance basis rules) will cease.
• In general, all UK tax residents will be subject to UK Income Tax (IT) and UK Capital Gains Tax (CGT) on their worldwide income and gains. However, there will be an exemption from IT and CGT on foreign income and gains for the first 4 years of UK tax residency for individuals coming to the UK following 10 consecutive years of non-UK tax residence (hereafter the “4-year exemption”).
• Individuals who move from the remittance basis of taxation to the new rules, but do not qualify for the 4-year exemption, will be subject to IT on only 50% of their foreign income in 2025/26. This does not apply to foreign gains or to any tax years after 2025/26.
• For disposals after 5 April 2025, a rebasing for CGT purposes to 5 April 2019 for assets held personally on 5 April 2019 by non-doms who have claimed the remittance basis of taxation, and are neither domiciled, nor deemed domiciled, in the UK by 5 April 2025.
• A temporary flat rate of tax at 12% for remittances of foreign income and gains that were previously sheltered from UK tax under the remittance basis. This is only set to be available for the 2025/26 and 2026/27 tax years.
• Moving Inheritance Tax (IHT) to a residence-based system (rather than domicile based). The Government has suggested that, for example, an individual will become liable to IHT on their worldwide assets after 10 years of UK tax residence.
• In relation to Trusts settled by non-doms, the removal of certain IT, CGT and IHT protections for foreign income, gains and assets in those Trusts. However, the Government has stated their intention to retain an IHT protection for Trusts settled by non-doms before 6 April 2025.

The abolition of the non-dom regime is one of the Labour Party’s key tax policies and so they are largely in support of these changes. However, they are opposed to the 50% foreign income exemption for 2025/26 noted above.

They have also pledged to scrap the current IHT protections that can apply to existing Trusts settled by non-doms, rather than simply removing these protections for new Trusts settled on or after 6 April 2025 as proposed by the Government.

Who will benefit and who won’t?

As with any rule changes, some will benefit, and some will lose out from these proposed reforms if they are implemented.

The ‘winners’ of these changes would include:

• Short-term migrants: Individuals who want to come to the UK for no more than 4 tax years will benefit from the 4-year exemption without having to keep their foreign income and gains outside the UK, as they would under the existing remittance basis rules.
• UK ex-pats: UK domiciles who live overseas may benefit from moving the IHT regime to a residence-based system as they will get certainty that after a certain period of time they will be treated as a non-UK individual when assessing their IHT exposure.
• Potential users of the 12% rate: Many non-doms will have overseas wealth that they would like to bring to the UK but are unable to do so without triggering significant tax charges under the remittance basis rules. However, they will be given a window of opportunity to remit those funds at a temporary low rate.
• UK domiciles returning to the UK after a 10-year absence: UK domiciles who have gone abroad for more than 10 years can benefit from the 4-year exemption on returning to the UK. At present, they would not receive any special tax treatment in these circumstances.

Those who will be in worse position include:

• Non-doms living in the UK: These individuals stand to lose out on a number of fronts. For example, existing remittance basis users who do not qualify for the 4-year exemption will become liable to UK tax on their worldwide income and gains.
• Longer-term migrants: Non-doms who are planning on coming to the UK for more than 4 years will only be exempt from UK tax on their foreign income and gains in those first 4 years, rather than up to 15 years under the existing rules. Furthermore, those coming to the UK for at least 10 tax years will face IHT on their worldwide assets after that 10-year period. For families hoping to put their children through school in the UK this could be a major issue.
• Overseas Trusts and their UK beneficiaries: Some overseas Trusts and their beneficiaries will see their UK tax exposure increase on the withdrawal of various UK tax protections. Perhaps the most significant of these is the IHT Trust protection that the Labour Party intends to abolish if they come into power.

Looking ahead

An individual’s tax residency position is usually easier to determine than their domicile and therefore moving to a residence-based tax regime could simplify the system going forwards (although see some practical issues with applying the residency tests here).

What remains to be seen is whether or not these proposals will generate the amount of tax that the Government is budgeting for and increase inward investment in the UK. The big question is how many existing non-doms will leave the UK or be deterred from coming to the UK as a result.

Finally, with these changes yet to be written into law, and with the General Election set to take place on the 4th July, there is a high level of uncertainty about how and when the proposals will be implemented.

If you would like to discuss your specific circumstances, please get in touch.